Neugebauer to FIO: I'm concerned about IAIS proposals

By National Underwriter

National Underwriter


By Elizabeth Festa with Dave Postal

Congress is taking one of its first moves into oversight of the Federal Insurance Office (FIO) activities by requesting a strong stance on concerns about international insurance regulatory proposals.

Chairman of the House Financial Services Subcommittee on Housing and Insurance Rep. Randy Neugebauer told FIO Director Michael McRaith at U.S. Treasury that international standard setting proposals could impose unnecessary costs on insurance consumers and hurt the U.S. competitive marketplace.

Neugebauer wrote to McRaith, who also heads the influential technical committee of the International Association of Insurance Supervisors (IAIS), that both IAIS major work streams -- ComFrame and standards for systemically risky insurers are, as currently crafted, bad for the U.S. economy and consumers.

Neugebauer’s letter, dated March 26, reflects the concern of many in the U.S. state regulatory and industry community.

Neugebauer even made clear he was concerned that the proposals could undermine the state-based system of insurance if they were not modified and said he wants McRaith to stop and trickle down regulations that could come from attempts to rein in excessive risk taking by large complex financial institutions.

The current draft of a major IAIS initiative called ComFrame "includes an onerous group-wide capital assessment process that would require U.S.-based international insurers to hold more capital on a discriminatory basis than similarly-situated insurance groups that operate entirely within the U.S.or other major jurisdictions," Neugebauer wrote.

Neugebauer wrote he won't welcome a "one-size-fits-all" regime to be placed over U.S. insurance companies solely because they are internationally active, and wants McRaith to stand up to such an imposition.

They would impose “significant and unjustified costs on U.S. insurers that would be borne by U.S. policyholders and investors,” he said.

“These increased costs would also put American insurers at a competitive disadvantage in foreign markets, create disincentives for job creation the U.S., and act as trade barriers in already protectionist-minded foreign jurisdictions,“ Neugebauer wrote regarding ComFrame.

The Congressman also expressed concern for IAIS potential proposals to name any U.S. insurers as global systemically important insurers, or G-SIIs.

The 2009-established Financial Standards Board (FSB), created under the G-20, is expected to have a final decision on a current crop of proposed G-SIIs, by the end of June, including the determination whether there are any.

ComFrame does not have its own legal authority, nor does the IAIS, which is based in Basel, but there will be enormous pressure on the U.S. to implement it-- so thats why getting it right is some important, the industry says.

ComFrame in its current form would recommend and push toward additional requirements on U.S. companies that are competing internationally and attempt to impose new layers of regulation via corporate governance, and with a capital assessment, companies warn.
In fact, there is now a separate IAIS group that will look at what that capital assessment will be under ComFrame, and to look at whether there ought to be global standards or not, industry notes.

As for G-SIIs, they would be subject to stricter supervision and higher capital requirements in various areas deemed risky, the Congressman worried. Neugebauer also wrote that they would be subject to consolidated supervision by the Federal Reserve Board, but that is not clear if this is true. Statutory changes would be required under U.S. laws to implement some of the provisions. The IAIS does not make the Fed a de facto regulator for designated companies, nor can it without legislation.

Also, according to recent press reports, the IAIS does not plan to require G-SIIs to hold extra capital, other than for specific non-traditional insurance business, writes analyst Sean Dargan of Macquarie Capital (USA) Inc. However, variable annuities may be considered to be a non-traditional line of business, many worry.

However, Dargan believes believe the Federal Reserve will take its cues around U.S. non-bank systemically important financial institution (SIFI) capital requirements from the IAIS and that there will not be material changes to capital requirements for MetLife and Prudential, two companies Dargan sees as potential G-SIIs.

Thus the concern that where IAIS leads, others will follow.

Neugebauer said FIO should not support a "rush to judgment" by the IAIS in order to meet "an arbitrary deadline."

The Congressman also asked FIO to work with members of the Treasury-led Financial Stability Oversight Council (FSOC), which can and likely will designate nonbank SIFIs, and the U.S. members of the FSB "to reject IAIS recommendations that do not comport with U.S. law and regulation."

Irrespective of McRaith's IAIS leadership position, FIO has the authority under Dodd-Frank to coordinate federal efforts on prudential aspects of international insurance matters and represents the U.S. on the IAIS.

But McRaith has been engaged and active on ComFrame and has led dialogues surrounding various approaches to methods of group-wide supervision of Internationally Active Insurance Groups (IAIGs).

McRaith is also working with IAIS members to build a framework to address group-wide activities and risks and to foster global convergence of regulatory and supervisory measures and approaches, as ComFrame calls for.

Under the proposed criteria, there are about 50 groups that could be considered IAIGs.

The IAIS began the development of the Common Framework for the Supervision of Internationally Active Insurance Groups (the longhand for ComFrame) in July 2010. ComFrame has a three-year Development Phase, so some overarching proposals are due out this July.

Neugebauer expressed concern that ComFrame even now conflicts with current U.S. insurance regulations.

Others agree.
“Congress is sending a clear signal that the IAIS’ G-SII and ComFrame work should not interfere with state regulation and should not impose additional requirements on US companies putting them at a competitive disadvantage in foreign markets,” said Dave Snyder, international affairs expert with the Property Casualty Insurers Association of America (PCI).

“This letter is a very timely reminder by Congress that the GSII process should not result in more regulation in activities that are not systemic,” Snyder said.

Neugebauer is requesting that McRaith meet with him to discuss the next steps in these international negotiations.

The IAIS had no comment officially while the press office at Treasury did not return a query.

“There have been several conversations with industry on this, and it’s fair to say that the potential G-SII’s are freaking out about dual regulation and capital standards and a one-size-fits-all approach to completely different operating models and risk levels. But regardless, the IAIS is moving forward with or without McRaith,” said one industry lobbyist close to talks between IAIS and the industry.

“I don’t think is anything more than [Neugebauer] using his bully pulpit to remind [McRaith] that he’s being watched like a hawk. But that’s all part of the process, which is fine,” this person said.

The NAIC has no comment on the letter sent to FIO.

However, the NAIC has been on record consistently sharing many of the concerns raised by Neugebauer, from states rights to the nebulous capital standards overlay discussed at all levels--international through ComFrame and G-SIIs, and at the U.S. federal level. Immediate past NAIC President and Florida Insurance Commissioner Kevin McCarty outlined some similar issues involving “burdensome capital rules” to be imposed on insurers regulated as banks or thrifts under Dodd-Frank with the proposed Basel 3 capital standards in testimony before Congress late last year.

McCarty also raised concerns regarding the proposed application of “one size fits all” capital rules on thrift and bank holding companies predominately engaged in insurance activities in his Nov. 29, 2012 testimony.

“We fear the same over-reliance on capital could become a reality in our sector, with no diversity of regulation to mitigate the wrong incentives or prevent systemic risk taking. The existence of global capital standards in the banking sector did not prevent the last crisis and did little to prevent large institutions from becoming larger while chasing each other off their own fiscal cliff,” McCarty stated then.

FIO may have some support from the Fed if it takes a stance at all, with the Subcommittee.

Federal Reserve Gov. Daniel K. Tarullo recently urged careful consideration when designating insurers as non-bank systemically important financial institutions.

“It is important to take the time to evaluate carefully the actual systemic risk associated with these (insurance) companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges,” Tarullo stated in remarks Feb. 22 in New York.

It is unclear if Tarullo was targeting his remarks to the IAIS or the FSB, which makes the final determination on these designations.

Originally published on LifeHealthPro.com